Withholding and relief: Taiwan tax on payments to Italy

Taiwan-source income: where the payment is considered to arise

Taiwan taxes income on the basis of source when it is received by a non-resident. Taiwan-source income is income that arises from economic activity, business operations, or the use of property or rights in Taiwan, regardless of where the work is physically performed or where the contract is signed.

A royalty is Taiwan-source if the right is exploited in Taiwan. A licence fee for a trademark, patent or design is Taiwan-source when the licensee uses that right in Taiwan in commercial activity. A design licence fee paid by a Taiwanese manufacturer to an Italian licensor is Taiwan-source even though the design was created and the agreement was negotiated in Italy.

Similarly, technical service fees and knowledge-based income are Taiwan-source when they relate to business activity in Taiwan. An invoice from an Italian technical service provider for advice on a Taiwan manufacturing facility, a training programme conducted in Taiwan, or specifications written to support a Taiwan production run are all Taiwan-source. The nationality or location of the provider does not change the source.

This is the reason a cross-border licence or service agreement can create a tax bill in Taiwan even when the Italian licensor or service provider has no office, employees or physical presence there.

Royalties and licence fees: characterisation and withholding rates

The Taiwanese tax authority distinguishes between a royalty (a payment for the use of intellectual property or rights) and a technical service fee (a payment for know-how, expertise or services). The distinction is not obvious from the contract language alone, because a licence agreement often contains both elements. A contract titled a licence agreement may be treated partly as a royalty and partly as a service fee, depending on the substance of what is being paid for.

A royalty is payment for the right to use intellectual property: a trademark, patent, design, copyright, know-how, or trade secret. The payment is usually structured as a percentage of sales or a fixed amount per unit, and the relationship is passive; the licensor is receiving a return on the right, not performing a service. A trade mark royalty paid by a Taiwanese distributor to an Italian owner is a royalty payment.

A technical service fee is payment for the provision of expertise, support or services. It is usually time-based or project-based. Training, consulting, software development, technical support, quality inspection and testing are technical services. A contract under which an Italian firm sends an engineer to Taiwan to troubleshoot a production problem and prepare a report, charged by the day, is a service fee arrangement.

The boundary can blur when a licence includes training, updates, technical support or ongoing consultation. The Taiwanese tax authority may apportion the contract between the royalty element (the use of the right) and the service element (the support). The apportionment affects the withholding rate because the rates may differ. Where the contract does not apportion, the authority makes the apportionment for tax purposes.

Withholding at source: the Taiwanese payer's obligation

When a Taiwanese payer makes a payment to a non-resident payee that is Taiwan-source (such as a royalty or licence fee), Taiwan law requires the payer to withhold tax at source. The payer is responsible for calculating the withholding, remitting it to the tax authority and issuing a certificate to the payee. The payment received by the Italian licensor is the amount after withholding.

The withholding obligation falls on the Taiwanese payer regardless of what the licence agreement says. If the agreement is silent on tax, the Taiwanese payer must still withhold. This is a statutory obligation separate from the commercial contract. The payer cannot defer or delay withholding on the grounds that the licensor has not yet claimed relief.

A common commercial clause states that the licence fee is net of tax, meaning the Taiwanese licensee bears the cost of the withholding and remits the full contract amount to the licensor. This changes the economics of the deal: the Taiwanese entity pays more, the Italian licensor receives the full agreed amount, but the withholding is effectively a cost to the Taiwanese party. Conversely, if the agreement states a fee exclusive of withholding, the Taiwanese party pays the contract amount plus the withholding on top. The licensor receives only the net amount after withholding.

The Taiwanese payer is required to provide the non-resident payee with a withholding certificate showing the gross amount, the withholding rate, the amount withheld and the date. This certificate is essential for the non-resident to claim relief or a refund if entitled to it under a tax arrangement.

Permanent establishment: when Taiwan taxes your business profits

Permanent establishment is a concept that determines whether an Italian company's business profits are taxable in Taiwan. If an Italian company has a permanent establishment in Taiwan, it is liable for Taiwan profit-seeking enterprise income tax on its profits attributable to Taiwan activity. Without a permanent establishment, Taiwan generally does not tax the profits, only the Taiwan-source payments (such as royalties).

A permanent establishment exists when a foreign company has a fixed place of business in Taiwan through which it carries on business. A fixed place of business includes an office, workshop, factory, branch, or any premises occupied for business activity. An Italian company that opens a sales office in Taiwan or an engineering centre has a permanent establishment.

A permanent establishment can also arise from personnel. If an Italian company sends individuals to Taiwan who carry on business for the Italian company with a degree of continuity and decision-making authority, a permanent establishment may arise even without dedicated premises. An Italian technology company that sends technicians to Taiwan repeatedly to install, commission and train on a licensed system may create a permanent establishment through that presence, even if the company rents meeting rooms rather than maintaining an office.

This matters because once a permanent establishment is established, Taiwan taxes all the profits attributable to that establishment, not just the licences or fees. The Italian company becomes liable for filing tax returns in Taiwan, paying enterprise income tax and managing Taiwan payroll withholding if it employs people. Permanent establishment can arise unintentionally through operational or service activities.

Relief under double taxation arrangements: claiming your benefits

A tax arrangement between Taiwan and Italy is a bilateral agreement allocating taxing rights between the two countries. It specifies which country has the right to tax different categories of income, sets maximum withholding rates for certain payments (such as royalties), provides procedures for resolving disputes over double taxation, and establishes methods for relief such as a foreign tax credit or exemption.

The arrangement does not automatically relieve double taxation or reduce withholding rates. The non-resident recipient must claim the benefit. Claiming typically requires providing the Taiwanese payer or the tax authority with a certificate of residence issued by the Italian tax authorities confirming that the recipient is tax resident in Italy. The certificate must usually be current, issued within a specified period before the claim.

Relief mechanisms vary between arrangements. Some arrangements provide that income up to a defined threshold is not taxed in Taiwan at all. Others provide a reduced withholding rate on payments such as royalties. Some allow a foreign tax credit in the home country for tax paid to Taiwan. Some provide a procedure for matching corresponding adjustments between the two countries if one taxes more than it should. The specific relief available depends on the text of the arrangement between Taiwan and Italy.

A key practical point is that relief is claimed after the withholding has occurred. The Taiwanese payer withholds at the statutory rate unless the payee provides a certificate of relief at the time of payment. The recipient then seeks a refund or reduced withholding in a later filing or claim. This means the Italian licensor does not receive full payment until after the tax process is complete.

Confirming your position: Taiwan's diplomatic context and current arrangements

Taiwan's network of tax arrangements with other countries is shaped by its diplomatic position. Taiwan maintains comprehensive tax arrangements with a smaller number of trading partners than many other countries. An Italian company should not assume that the tax arrangement it is familiar with from other Asian or European partners applies to Taiwan, and should not rely on general knowledge of Taiwan's taxes without confirmation.

An Italian company with operations that will involve royalties, licence fees or service payments to Italy should, before entering into a contract, confirm with the Taiwanese tax authority or a Taiwanese tax adviser whether a comprehensive tax arrangement between Taiwan and Italy is currently in force, what relief it provides and what documentation is required to claim that relief. At the same time, it should obtain advice from an Italian adviser on the Italian tax consequences of receiving income from Taiwan and the procedures for claiming relief in Italy if Taiwan has withheld tax.

This guide contains general information about how Taiwan's tax system treats cross-border payments. It does not address the Italian tax consequences, and it is not a substitute for professional advice applied to your specific circumstances. A company's actual tax position depends on facts that only that company knows: the nature of the payment, the commercial relationship, the location and authority of personnel, and the existence and content of any tax arrangement. Before implementing a cross-border arrangement involving royalties or service fees, consult a qualified adviser in both Taiwan and Italy.